Current global LNG trade patterns will change drastically in the next five years as large new LNG projects start up and traditional markets weaken. Despite low prices, demand will stagnate in Japan and Korea—the top two LNG buyers in the world—and suppliers will be forced to hunt for fresh markets. This will throw the global gas trade into a bit of a spin, according to the U.S. International Energy Agency (IEA).
In its 2016 Medium-Term Gas Market report, the IEA says slower primary energy demand growth and the decline in the energy intensity of the world economy are impacting all fossil fuels, including gas, and isn’t being set off by low prices. Fossil fuels struggle to compete against the much-cheaper coal and the growing renewable energy sector.
Despite being very gradual, gas demand is on the rise, and the IEA projects a 1.5 per cent year-over-year rise that will reach 3.9 trillion cubic metres in 2021.
Exports, however, will far outstrip those numbers. Between 2015 and 2021, LNG export capacity is expected to grow by approximately 45 per cent, 90 per cent of which will come from the U.S. and Australia. A substantial amount of the projected increase will come from projects that have already been approved and, in most cases, are already in advanced stages of development and backed by long-term contracts. Today’s low prices will have little impact on whether or not these projects get the go-ahead.
Markets will struggle to absorb the excess supply, and competition will be intense, especially for those producers hoping to retain or gain access to European customers because of its gas system and well-developed spot markets.
China will be one of the most likely candidates to soak up the market overflow. Though China’s demand growth slowed drastically in 2015 to a rate of approximately four per cent compared to 15 per cent in 2009-14, the slowdown was increased by temporary factors. Unlike oil, domestic gas prices did not adjust quickly to reflect the fall in international benchmarks, resulting in a big loss of competitiveness for gas. With domestic gas prices now also dropping, demand should recover going forward.
Inevitably, global LNG export infrastructure will need to run below capacity to have a chance of balancing the market, says the IEA. Demand is expected to cover by the end of the forecast period, but it’s unlikely to reach the sky-high levels of 2011-12.